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First Midwest Bancorp Inc (NASDAQ:FMBI)
Q1 2020 Earnings Call
May 1, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, and welcome to the First Midwest Bancorp 2020 First Quarter Earnings Conference Call. Following the close of the market yesterday, the company released its earnings results for the first quarter 2020 and also issued presentation materials that will be referred to during the call today.

During the course of the discussion today, management's comments and the presentation materials may include forward-looking statements and non-GAAP financial information. The company refers you to the forward-looking statement, non-GAAP and other legends included in this earnings release and presentation materials, which should be considered for the call today. [Operator Instructions]

Following the presentation by Mike Scudder, Chairman and Chief Executive Officer; Mark Sander, President and Chief Operating Officer; and Pat Barrett, Executive Vice President and Chief Financial Officer, the call will be opened for questions and answers for analysts only.

I will now turn the call over to Mr. Scudder.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Great. Thank you. Good morning, everyone. Thanks for joining us today. It's great to be with you. And I hope this finds everyone, along with your families, doing well and staying healthy. From my perspective, as you go through and prepare for these calls, it's really an understatement to suggest that these are unprecedented times. Certainly not times that we would have anticipated when we began the quarter or certainly times that one would have anticipated, frankly, over the course of our careers. From my perspective then, so while we're going to cover the financials today, to me, at its core performance for this quarter is really less about the numbers and more about the strength and character of our company and our team, all of which was on display as we had to pivot pretty radically away from what our operating plans were when we started the year and respond to the necessities of dealing with COVID-19 and the underlying pandemic crisis.

This has been an absolutely amazing time as one reflects. And frankly, I'm just extremely proud of how our team and the banking industry as a whole has really pulled together. Mark has led the vast majority of those efforts across our company and done a tremendous job. So I want to give him the opportunity to cover the specifics of what we've done on that front before we start talking about the quarter. We just accomplished a tremendous amount that fell outside of the ordinary course of business.

And just doing our part to really meet the needs of our colleagues, our teams and our clients as a whole. So we had to adapt our platforms, distribution operations. We had to heighten safety, help colleagues and send our frontline teams, work to meet the needs of our clients really hard and do all of that, recognizing the stress that's just on individuals and business cash flow needs, so. And simultaneously, the collection of all that influences our communities and their need for support as well. So Mark, why don't you cover that slide that talks specifically about all the efforts on that arena?

Mark G. Sander -- President and Chief Operating Officer

Thanks, Mike, and good morning, everyone. Right. As you can see on page two of our deck, we responded, as Mike said, on numerous fronts to these unprecedented times. Everything we do, as always, is done through the lens of supporting our colleagues, to serve our clients and communities. Never has that been more important than now. As we adapted our operating model, we maintained employment and pay levels for all colleagues, and in fact, enhanced pay for those who cannot work remotely.

We also expanded benefits to support our colleagues in need. Similarly, we rolled out many programs to support all of our clients, while maintaining services as best as we can at levels that have won us awards in the past. Thus far, we've approved $1.5 billion in commercial payment deferrals for over 1,900 clients, representing nearly 15% of this book. In addition, we've approved $150 million in deferrals for 2,000 consumer clients or about 5% of that book. And as the payment protection program consumed the lives of hundreds of our colleagues the last month, we're pleased to have helped over 5,500 clients secure $1.2 billion in funding.

Importantly, these loans have impacted the lives of over 125,000 of their employees. And then last but not least, we have increased our support to our communities as well, committing to an additional $2.5 million donation from our charitable foundation, which is, of course, on top of everything that we normally contribute. So to sum up, I just want to reiterate what Mike said. I'm tremendously proud of how our colleagues have responded to this stress. I think it speaks volumes about the culture of our company, really. It's built simply on good, caring people doing the right thing, and that's what we've done.

So back to you, Mike.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

All right. Thank you, Mark. So with all of that as a lead-in, I want to talk about the quarter. It was certainly, to say the least, an active one. And as we said, reflects the practical side of the need to pivot and respond to COVID-19, as well as the additional implications of the impact of our closing on our acquisition of Park Bank as well as the accounting implications of transitioning to CECL. So recognizing the need and you all's desire for all of those elements, and I'll leave the reconciliation of all of that to Pat and Mark as we walk through it. I'll keep my comments at a pretty high level and leave the heavy lifting to them. However, I would give you a few observations and highlights as I think about the quarter as we go through this.

First, EPS, as we booked, it was $0.18, but that reflects an additional $28 million or $0.19 per share in loan loss provisioning due to COVID-19 and the environment companion to that. We had $0.04 per share in acquisition costs, in line with what we expected we were going to do and just related to the fact that we closed on Park Bank on March 9. We also had certain elements of performance that didn't fall into what I would call normal adjustments, but were the practical realities of dealing with the operating environment that we're in. We had $0.01 worth of security losses. We had some MSR swings that were probably another $0.01.

And then we probably had elevated occupancy, pandemic-related costs that maybe hit another $0.01 as you went through it, related to cleaning and different things that one did for the building. So if you add back just the provisioning and the acquisitions, that puts us at about $0.41 a share. You could probably get yourself to $0.42, $0.43 if you add back some of the other elements related to the environment. From a pre-tax, pre-provision perspective, away from acquisitions and security losses, we really generated a solid $72 million for the quarter. So as we think about the change from last quarter's performance away from provisioning, it was pretty much what we expected and largely due to the drag that we saw in revenue from the decline in interest rates and just the natural change that goes on relative to accretion.

And the other element that we saw was we really just had record fee levels in the fourth quarter of the year. So we were really coming off a period of pretty high. And then on a linked-quarter basis, it goes without saying there's obviously fewer days in the first quarter. Net interest income was $144 million. That's down compared to the $148 million in the fourth quarter and up from $139 million a year ago, our margin was $354 million. If you think about it relative to the fourth quarter, our average earning assets grew 3%. That's 12% annualized, but the benefit was really more than offset by the margin, which dropped about 18 basis points. Again, for the combination of shift in rates and shift in accretion as you go through and think about that and fewer days in the quarter.

And then if you look at it relative to a year ago, our average earning assets were up 17%, which again was offset by the margin and the decline that we saw there largely due to rates. Loan growth was pretty solid. Mark will talk about this, but our lending increased to $14 billion. That's up about 9% from year-end. About 2/3 of that growth was related to the closing of Park, and the rest was really due to production.

Fee revenues were down, as we said, from a record fourth quarter, largely due to the decline in the more rate-sensitive capital markets, swap-related activity and mortgage income line items. But all in all, they were still up 15% from where we were a year ago. And then finally, away from acquisition costs, noninterest expense was essentially flat if you allow for the incremental growth and really look at things as it relates to expenses as a percentage of average assets and size. It was improved on a relative basis, both from fourth quarter and a year ago, looking at those metrics.

Our credit metrics are really distorted by the combined impact of CECL and acquisitions and all the ebb and flow that goes along with that. If you wipe all of that out and all said and done, our relative position as it relates to overall asset quality is pretty much unchanged from the fourth quarter. Obviously, we did book the $20 million in additional provisioning for COVID-19, and certainly, we can explore that further.

And finally, very excited about Park close. Great team, great people. They've really stepped up. Our teams are ready to go, and we continue to be on pace for a mid-June systems conversion, which then will obviously see the contribution from our combined operations really start to grow in the third quarter. So with all of that, let me turn it over to Mark and Pat, and they can give additional color as they walk you through the remainder of the materials. Mark?

Mark G. Sander -- President and Chief Operating Officer

Yes. Thanks, Mike. And so picking up on page four for loans, we grew $1.1 billion this quarter. At a high level, the major elements of this were about $700 million from Park, $210 million from commercial and $120 million in consumer. Clearly, we're delighted to have closed on Park and to welcome their high-quality C&I and CRE relationships. But importantly, as Mike alluded to, we really welcome our new colleagues. They've been absolutely stellar in working through the current challenges, which just reinforces our optimism about the future of our Wisconsin franchise.

Away from Park and away from the pandemic, we had a really good quarter of loan growth. In commercial, our growth was 50% line draws and 50% strong production. While net line draws increased about $100 million and some of that was driven by the pandemic, we typically see net line increases in Q1, and our utilization only picked up about 1% from year-end. More notably, we saw a healthy level of new loan activity from the strong pipeline I mentioned last quarter. Each of our commercial business lines saw growth this quarter, as although payoff activity remained high, we had very good production across our commercial segments. And we've spoken for some time about the advantage of having different levers, but it's really nice when all of them see growth in a single quarter.

In consumer, we bought some high-quality HELOCs early in Q1, given their attractive risk return profile. We also held more of our mortgage production on the balance sheet this quarter. So looking forward, while we remain in active dialogue with clients and prospects, it's frankly pretty tough to project future loan growth at this point, given the uncertainty around the timing of the resumption of activity and borrower sentiment. Page five is the first of a couple of slides that speak deeper to the loan book, given current circumstances and the anticipation of greater asset quality stress across the industry. We have a very granular and diversified corporate portfolio with modest exposures to the most stressed sectors in the economy. These elevated risk segments represent less than 5% of our corporate loan book.

And certainly, they should all get some measure of relief from their active participation in our deferral programs and the PPP. Similarly, we feel good about our consumer portfolio, as demonstrated on page six, given our underwriting parameters over the last several years. We stay at the upper end of FICO scores across all consumer segments and maintain modest loan to values in residential lending. The area of consumer lending that we view as highest risk is also a very modest portion of our total book here and has very high FICO scores. More broadly, we've analyzed our entire portfolio much deeper in light of the current environment, of course, and believe our diversity, underwriting and regular portfolio management disciplines will serve us well as we navigate this uncertain future.

So Pat's now is going to pick it up and talk about some specifics around credit metrics. Pat?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Thanks, Mark. Moving to CECL, to start with on slide seven, our allowance increased by $118 million from December 31. 2/3 of this increase was due to the adoption of CECL on January 1, resulting in a total increase of $76 million to our allowance, in line with our previously communicated day one expectations. Approximately half of the $76 million increase was driven by the transition of credit marks to allowance of previously acquired credit impaired loans. In addition, the current quarter allowance increased by $28 million, reflecting day two reserving for the expected deterioration of economic conditions due to COVID-19.

There was minimal impact to our regulatory capital as we elected the CECL transition and COVID-19 regulatory capital relief deferrals, which allowed us to retain approximately 20 basis points in common equity and Tier one capital. Excluding the deterioration of economic expectations, we actually experienced a modest reduction or improvement in our allowance of approximately $2 million. The final piece of a very noisy quarter for credit reserving was the addition of Park Bank, driving increased reserves of approximately $16 million, virtually all of which related to acquired PCD or credit impaired loans. Our provision expense of $40 million reflects the $28 million increase in allowance established for COVID in the quarter, $2 million for Park and reserves replenished on charge-offs of around $10 million.

Moving to asset quality on slide eight. We saw an increase in nonperformers in the first quarter, largely driven by the adoption of CECL and the recharacterization of existing purchase credit deteriorated loans to nonperforming. Note that this does not suggest that there's been any deterioration in the category, only a change in the definition. Excluding this impact, nonperforming loan and asset increases were modest and consistent with normal quarterly fluctuations. Similarly, the four basis point increase in net charge-offs during the quarter was entirely driven by the requirements of CECL accounting. Absent this change, net charge-offs actually declined modestly.

Briefly touching on deposits on slide nine. This continues to be a good story and a real strength of our franchise. We did see normal seasonal declines in certain segments as well as in CDs, offset by the addition of Park. Our 78% core deposit ratio continues to leave us with an advantageous cost of funds, although in this low interest rate environment, that competitive difference has narrowed somewhat. Nonetheless, it's nice to remain at the low end of the industry's cost structure here. And in the near term, we would expect further declines in costs combined with likely growth in balances.

Turning to funding and liquidity on slide 10. Our $13 billion granular and stable long-term deposit base is our primary source of liquidity. Additionally, we have over $6 billion in additional funding sources that provide ample capacity to support clients, colleagues and communities. Note that part of our funding sources are highlighted as capacity for increased borrowings through brokered CDs. This capacity is relative to our internal policy limits. Excluding brokered CDs, our capacity remains significantly higher than our total unfunded loan commitments of approximately $3 billion.

Turning to net interest income and margin on slide 11. Net interest income decreased 3% compared to the prior quarter. It was up $5 million or 3% compared to the same period in 2019. The decrease compared to the prior quarter was due to lower interest rates and acquired loan accretion, partly offset by lower cost of funds. Compared to the prior year, the increase was due to the acquisition of Bridgeview that closed in May of 2019. Securities purchases, loan growth and accretion and lower funding costs, significantly offset by the impact of lower interest rates. Acquired loan accretion contributed nearly $7 million to the quarter, down from $10 million in the prior quarter and roughly flat to the same period a year ago. Accretion was higher than expected due to favorable resolution of certain acquired loans, as well as finalization of CECL adoption and the allocation of credit marks to the allowance.

Moving to net interest margin. Tax equivalent NIM for the current quarter of 3.54% was down 18 basis points linked quarter and 50 basis points from the same period a year ago. Excluding accretion, margin was 3.37% for the quarter, down 11 basis points from the prior quarter and 49 basis points from the same period a year ago. Margin compression was primarily driven by the impact of lower market rates on loan yields compared to both prior periods. Compared to the prior quarter, this was partly offset by lower cost of funds. Compared to the prior year, margin compression also reflected actions we took to reduce rate sensitivity.

Moving to our 2020 NII outlook, excluding the impact of loan growth for the remainder of the year, we expect modestly lower NII, excluding accretion compared to the prior year, assuming the current rate environment continues for the rest of 2020. Accretion is expected to be approximately $22 million, down nearly 40% from 2019 at around $5 million per quarter for the remainder of the year. Note, this is after adjusting for the impact of CECL, which results in approximately $3 million of accretion being reflected as a reduction in loan loss provision throughout the year.

Our outlook for core NIM is for continued compression in the near-term, as continued loan repricing is expected to bring yields down by more than deposit cost can fall. Given the unpredictability of earning asset growth through the remainder of the year, our ability to project where NIM ultimately settles is challenging. And accordingly, we're not offering more detailed forward guidance. With that, I'll turn it back over to Mark to discuss noninterest income on slide 12.

Mark G. Sander -- President and Chief Operating Officer

Thanks. Here, you see on slide 12, noninterest income. We had a very solid quarter and right in line with our guidance. We were down linked quarter as expected, and as Mike alluded to, given the normal seasonality as well as the elevated levels of mortgage and capital markets revenues in Q4. We think a better measure of our performance is the year-over-year comparison, where we were up $5 million despite a $1 million securities loss and a $1 million decline in the valuation of mortgage servicing rights. We did benefit this quarter from almost $2 million in additional fees from our acquisitions. Away from all of that, our legacy fees were up 10% year-over-year in Q1. Swaps remain strong, albeit lower than our record levels last quarter, and we saw modest incremental growth in most other categories.

Going forward, we will see some pressure off our normal fee run rate in Q2 as our client accommodation programs are expected to cost about $1.5 million, and activities that drive service charges, card income and swaps have all slowed given the pause in economic activity. As a result, the impact of the pandemic will likely drive full year noninterest income down modestly from 2019 levels.

Back over to you now, Pat.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Moving on to expenses on slide 13. Note that the current quarter includes $5 million of anticipated acquisition and integration-related expenses, largely driven by cost associated with the Park acquisition. Away from these items, total expenses were consistent with the fourth quarter and up 14% compared to the same quarter a year ago. The increase compared to the prior year was driven by our larger operating base due to acquisitions, combined with higher salary expense, reflecting merit increases, higher mortgage commissions due to higher production volumes, and higher professional services related to continuing investments in technology and process enhancements.

Compared to the prior quarter, expenses reflected increases in occupancy, related to snow removal and ongoing technology-related investments. We continue to be focused on our expense run rate. And while our efficiency ratio has ticked up due to revenue declines in the first quarter, overall annualized expenses as a percentage of average assets was 2.44%, down three basis points from the prior quarter and down 10 basis points from a year ago. Our outlook for the second quarter is the expense run rates away from acquisition and integration costs will likely tick up modestly, reflecting a full quarter run rate from the Park Bank acquisition, combined with pandemic-related costs that we expect will normalize, along with the operating environment.

Annualizing Q1 expenses should be a reasonable estimate for full year total expenses based on our current outlook. A last note on taxes before I leave this slide. Our effective tax rate for the quarter was approximately 25%, consistent with our guidance, and we expect that to continue through the year. Moving to capital on slide 14. In addition to solid credit reserves and ongoing capital generation through earnings, our capital levels are strong and in excess of well-capitalized levels. We consumed around 95 basis points during the first quarter as a result of the Park acquisition, which had a 50 basis point impact. Share repurchases at the beginning of the quarter with a 15 basis point impact as well as the impact of loan growth.

We elected the CECL transition for regulatory capital relief, which allowed us to retain about 20 basis points in common equity and Tier one capital. In addition, our tangible book value of $13.14 per share is up nearly 4% from a year ago. During the quarter, we repurchased 1.2 million shares common stock at a total cost of around $23 million during the quarter. In March, we suspended share repurchases to strategically focus on capital deployment, supporting clients, colleagues, communities and the broader economy. And we'll reassess this over time as the operating environment stabilizes.

During the quarter, we paid a dividend, representing more than a 17% increase from the same period a year ago. Consistent with our usual practice, we've summarized our outlook for 2020 on slide 15. I'd emphasize that we've formally withdrawn full year guidance for 2020 that we had communicated at the beginning of the year. Any remaining updated commentary or outlook this quarter is limited, as future results are dependent on the persistence and impact of the pandemic, customer behaviors and the impact of significant federal stimulus activities. We've also included for your convenience, a summary of our financial results for the quarter on slide 16 and an update on the status of the Park Bank acquisition and integration on slide 17.

Now I'll turn it back over to Mike for final remarks.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Thanks, Pat. So sure anxious to get to your questions. So some further remarks, and then we'll open it up. Just to add on to what Pat said, from my perspective and that as the company is, as we think about it, the practical reality in this environment is that absolutely no one can predict the future or where that outcome is going to come at this juncture. As I think about it, and as we think about it, the quarter this quarter, as I started off with, was largely a pivot. You simply had to take your tactical plans, drop them and put your energy and focus into where it really needed to be invested the most, and that was in the health and safety and response to the needs of your colleagues, your clients and the operational needs of continuing to execute.

The second quarter, as we look forward, we'll see the impact of those investments and the shift as you start to do that. You'll see the revenue and costs associated with programmatic impacts of colleague incentives and client accommodations and those things fall through. You'll see the full impact of rates going to 0 and the move from that standpoint. And you'll see, as Mark alluded to, the impact of business and consumer distraction on production and operations for the quarter. And all of that, to some degree, will be offset by the impact of the PPP program and funding and the influence of stimulus as that rolls out, so.

And then lastly, in that circumstance as it relates to the second quarter, we'll also see the conversion and onboarding of Park's full team and clients, which we're very excited about. So as the second quarter unfolds, we would obviously expect to have a better read on a return to whatever the definition of a new normal is as folks are looking at and also a better read by extension on what the impacts are on reserves and economic outlooks and credit outlooks as you go forward. But away from all of that, as you think about the course of business as things start to normalize, I think it's important, and we've talked about it internally here.

It's particularly important to continue to invest and execute on your business priorities. And just those are talent, the team's diversification, what are you doing to manage your risk, how you're investing in your systems. And we talked about it 90 days ago, where we said our efforts in 2020, we're going to continue to see us invest and work to better leverage our resources, the technology and our processes to be more efficient. And deliver a better and more efficient experience for our clients by extension.

I think even then, we thought that the opportunity of 2020's environment and the capabilities from a technology standpoint, we're going to create a greater incentive to do that. In my view, the environment we're living today hasn't diminished that at all. So we actually started this year looking to make those investments and starting the automation processes and a number of things with that in mind. And while all of that has been slowed by the response to COVID in early 2Q, that objective's still there and the incentive remains. And I think it's more important to continue to execute on those as the environment stabilizes.

In this environment, we've learned a lot. And as that work picks back up, I think that will leave us well positioned as we drive into 2021. So in summary, as we go back, and I'll open it up for questions. We've got a strong balance sheet. We've got an engaged team. We're going to continue to invest in our systems and our capabilities. And I think by extension that leaves us well positioned and committed to supporting our clients and our communities and executing on our plan as we navigate whatever new normal means here as we go forward. So with that, I'll open it up for questions. I'll kind of serve as a quarterback and given that we're all in disparate locations, kind of queue Mark and Pat and others to respond to the questions. Let's open it up.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Chris McGratty of KBW. Please go ahead.

Chris McGratty -- KBW -- Analyst

Hey, good morning. For the question. Mike or Pat or Mark, the disclosures in the deck; were great. Just had a couple of follow-ups on a couple of other sectors. You called out, I think, $60 million of retail exposure. That would imagine that's just direct to retail. But you also have correct me if I'm wrong, around $600 million or so of retail CRE. I guess, number one, is that about the right exposure? And then how are you feeling about that portfolio? And second, senior housing's gotten a lot of attention. So maybe you could remind us the exposure to senior housing in healthcare.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Mark, why don't you take off?

Mark G. Sander -- President and Chief Operating Officer

That would be great, yes. So Chris, no. The answer to your question is no, that you're a little high. Our retail our CRE retail is more about $450 million, not $600 million. And how we're feeling about it is, as good as you can. I mean, it's we don't have big box. We have small strip centers, service-oriented properties. So obviously, it's impacted, but I like the makeup if it's just a relatively modest portion of our CRE book, and I like the composition of it as well as you can in a world where shopping has been pulled back. So that's let say, it's more like $450 million. Relative to senior housing, that portfolio is around $700 million.

Again, feeling good there. It's obviously, it's a high-risk area as well. That is an industry that has dealt with infectious diseases as a matter of course. And so I don't mind to be cavalier about it by any stretch. On the other hand, we don't we have won, I think, that has some a case, and they've kept it contained so far, we really feel good about mostly multi system multi facility operators is what that portfolio consists of.

Chris McGratty -- KBW -- Analyst

Great. Mark, I missed it in your prepared remarks, the deferrals. Could you just repeat the deferrals that have been discussed or executed for the commercial and the consumer book? And then how that had been trending maybe over the past few weeks?

Mark G. Sander -- President and Chief Operating Officer

Yes, that's it's a great question. The so the specifics are, it's about $1.5 billion in commercial deferrals. And about $150 million in consumer deferrals. And as you'd suspect, they've been trending down rather significantly the last two weeks. So they're still coming in, but trending down again rather substantially.

Chris McGratty -- KBW -- Analyst

Great. And then maybe I could sneak one in for Pat. I don't want to leave you out. The mark could you remind us what the remaining mark is or what the pro forma mark is on the balance sheet from all the acquisitions? Maybe if you had any color between rate and credit?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes. I think we're hovering around we ran some off and then added some back with Park and then we remain somewhere in the $60 million range, and that's split about 2/3 credit and 1/3 interest rate.

Chris McGratty -- KBW -- Analyst

Thanks a lot.

Operator

Our next question comes from Terry McEvoy of Stephens. Please go ahead.

Terry McEvoy -- Stephens -- Analyst

Hi, good morning. Just maybe starting with a question or two on page 17 of the release. The increase in construction nonaccrual loans from essentially 0 up to $18 million plus. Just curious if you have any comments there. And then also, the bump up in 30 to 89 days past due.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Mark, why don't you cover that, too?

Mark G. Sander -- President and Chief Operating Officer

Sure. So the first one, Terry is, was largely one loan that I have to say as much as we had to go nonaccrual because the owners are fighting among themselves, I feel good about that exposure, as good as you can feel about a nonperforming asset. I think that building will be completed. The owners have a lot of equity in it, and it's in a terrific location. So it's unfortunate to see it go non-accrual, but I feel as good about that non-accrual, if I can about any, honestly. Those are 30, 89s. It was unfortunate. A little bit of that got caught up in the pandemic, unfortunately.

It was largely driven by two large borrowers. One where we're the lead agent on a 3-bank deal, and candidly, our participants didn't get their approval done in time. And so that slipped over into 30 days. And the other was a borrower who is disputing some payments. The good news of all that is, both of those became current a week later, in the first week in April. So frustrating to see it there at the end of March, but the whole increase was driven by those 2, which have both been cleared up.

Terry McEvoy -- Stephens -- Analyst

And also, thanks for the comments on fee income. Can you just run through again your thoughts on kind of step down in card fee, service charges, capital markets? And I'm trying to maybe a better understanding of the base level in the second quarter to then model out the recovery that's mentioned on the outlook slide.

Mark G. Sander -- President and Chief Operating Officer

Sure. So again, our swap will take one at a time. Swaps came down from 6.2%. I think it was the 4.7%. So again, those are still our two best quarters ever, even though that's a $1.5 million drop. Swaps this next quarter is going to be tough. Activity has really pulled back. New loan originations are hard to come by right now. So I would think swaps will be quite light in the second quarter, frankly. Card, again, was one where normally, in February to March last year, we saw an increase this year, we saw almost a 20% drop.

So you can [Indecipherable], I think you can almost entirely attribute that drop to the pandemic. And again, until people get out there spending, we're a little cautious as to where that recovery comes back in. Our fee waivers alone, I think, will cost us, as I alluded to, about $1.5 million in Q2, Terry. So that's kind of is that answer fully it's hard to get a give you a number that's a run rate. That's why we try to project out a full year that says we'll probably be down modestly on a year-over-year basis.

Terry McEvoy -- Stephens -- Analyst

That's great. Understood. And then just one last quick one. The acquisition and integration-related expenses. I mean, if I just look across the last five quarters, it's a pretty sizable number. When does that kind of trail off? Is it after the June systems conversion, by the fourth quarter of this year? Will those be pretty close to 0?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Pat?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes. Terry, they'll likely largely drop off by midyear. So we had $5.5 million this quarter, this past quarter, and we'll have roughly $5 million in the second quarter, which should drop down to at most $1 million in the third quarter and then nothing afterwards.

Terry McEvoy -- Stephens -- Analyst

Thanks everyone. Stay healthy

Operator

Our next question comes from Michael Young of SunTrust. Please go ahead.

Michael Young -- SunTrust -- Analyst

Hi, might be. Thanks. Wanted to just ask about, I guess, loan growth generally. Mark, you mentioned that there wasn't maybe a whole lot of demand out there. But even if there were some demand, I mean, would you guys kind of be pulling in and batting down the hatches for what could or may be coming? Or are you kind of still open for business and looking for growth? And then I guess the second part of that question would be, how are you viewing consumer loan purchases in this environment and holding 1-4 family on the balance sheet?

Mark G. Sander -- President and Chief Operating Officer

Right. So the first one is, I'd say, somewhere in between. We're still open for business, very much so. But we've had to take a look and figure out where should we dial it back a little bit. And you just can't assume that when things are going to return to normal, so therefore, you have to get a little more conservative in your underwriting practices. I just think that's prudent. So we've taken a look across the portfolio and have, as I say, dialed back a little bit in certain areas, but we are still very much open for business. It's just where you're willing to go gets pulled in a little more conservatively. Relative to asset purchases, I don't think you'll see us grow transactional purchases.

We may look to do some just to keep flat, perhaps we haven't made final decisions there, I would say. In this environment, as people are loading up their balance sheets with PPP, there actually could be some decent assets to buy. But I don't think you'll see us do I don't think you'll see us grow that activity, Michael. And that's still to be determined, I would say. In terms of mortgages, we still had a good April in mortgage. So we'll continue to we're still open for business there. And we have a model that at a certain price, we believe, it warrants us keeping them on the balance sheet. And so we'll keep putting them through that lens.

Michael Young -- SunTrust -- Analyst

Okay. And then maybe just on the loan diversification page, number five. The healthcare segment that you show there. I know you guys have had some bankers and some team lift outs to build that business up over the last several years. Can you just kind of give us a variety of what's in that book? And any details around that would be helpful.

Mark G. Sander -- President and Chief Operating Officer

Sure. We have, in total, about as I said earlier, about $700 million in long-term care, I would say, than we have a couple of hundred million dollars in physician practices. We highlighted the dental. We have other physician practices as well to serve another $100 million thereabouts. And then we have a couple of hundred million relative to hospitals and miscellaneous, I would say. So that's all captured there.

Michael Young -- SunTrust -- Analyst

Okay. And then maybe just last, on capital. Maybe big picture thoughts, Mike, on just the dividend and sustainability of that. We saw one bank cut the dividend today. But doesn't seem like that's necessarily going to be an issue for a lot of people. Just curious what your thinking is there.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Yes. We've talked about just broadly, overall capital mix and continue to do that with the Board and have those conversations. I mean, if I go back to 2008, 2009, and as I started off of that, I think what you have to do is look at your overall capital mix and make those decisions as you navigate the environment. At this juncture, as Pat alluded to it, we've got good, strong operating leverage. We've got a nice, solid capital base. And our reserve levels, at least of what I've seen people reporting at are pretty healthy, even allowing for some of the expansion that comes back through from a transition to CECL. So we like where we're positioned. But obviously, that's something we're going to continue to talk about with the Board, and we'll talk about it with our shareholders, too.

Michael Young -- SunTrust -- Analyst

Okay, thanks.

Operator

Our next question comes from Nathan Race of Piper Jaffray. Please go ahead.

Nathan Race -- Piper Jaffray -- Analyst

Hi guys, good morning. Hope everyone's doing well. Wanted to start on slide five. And I know the general C&I piece doesn't really show up within the kind of more elevated risk segment, excuse me. But when I look at charge-offs over the last five quarters, that's constitutive a bulk of what you guys have recorded there. So just curious, maybe, Mark, if you could just comments on just how you think the general C&I book's going to hold up. As we enter this downturn, just given that it seems to have been, like I said, a bulk of the charge-offs historically.

Mark G. Sander -- President and Chief Operating Officer

Yes. Again, I would point to our well-diversified book. And modest exposures to the most stress sectors, Nate. Again, that's against a backdrop of what does this recovery look like? How quickly does it happen? And if it happens and what shape it takes? So it's a little hard to give guidance there, hence, why we've pulled back a little bit there. You see the estimate we put forward, relative to what we added to loan loss provision as a direct result of the portfolio analysis we did. So I guess that's the best answer I could give you is, we sacked away another $28 million to take care of the as our best estimates, if you will, of what that might look like.

Nathan Race -- Piper Jaffray -- Analyst

Yes. Totally understood that. Obviously, incredibly difficult to predict future credit costs across the industry. Appreciate that. And then just staying on the C&I piece for a moment. It. Seems like there was some good kind of organic strength in that segment in the quarter. It's driven out the Park deal. Just curious how much of that was line of credit draws versus just taking market share. And as clients maybe drew down on their lines, did that just largely sit in the bank? Or did you see them kind of utilize that liquidity just given some constraints out there today?

Mark G. Sander -- President and Chief Operating Officer

Yes. So it was, the growth was 50% line draws and 50% production. The line draws, it did sit. I'd say about half of it sat there because half of it, I would attribute to just kind of normalcy. Last year, in the first quarter, we saw about $60 million of line draw. So this year, we saw about $100 million. It doesn't seem unusual. And the ones that I can really point to the pandemic kind of driven were maybe half of that $100 million. So not really significant. In effect, it's starting to come down. I just don't see that as a big, significant factor. What I was pleased about was, again, what gets lost in all this is we had a really good quarter for loan growth because we had a good pipeline going into the year. And so and I don't know that second quarter will be the same, but it was nice to see it in Q1 where all of our business units had net growth. That was great to see.

Nathan Race -- Piper Jaffray -- Analyst

Yes, for sure. And then maybe changing gears for Pat on the margin on a core basis looking forward. I know it's difficult to provide guidance with all the various moving pieces, with PPP and so forth. But if we just kind of think about the trajectory of core loan yields, ex PPP, in the second quarter, you guys obviously executed some well-timed hedges late last year that brought, I think, your floating rate exposure down to roughly half of the portfolio. So just how should we kind of think about where kind of core loan yields go in the second quarter from 4.34% in 1Q, just given the recent Fed cut. And again, maybe just excluding PPP for the sake of this exercise.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes. Thanks for the question, Nate. And we're spending a lot of time trying to exclude PPP from lots of our discussion because it just really clouds a lot of metrics. But we're likely going to see that yield will continue to drop. You'll recall that probably 60% of our floating rate book is tied to LIBOR, one month LIBOR and the fall in those rates what's lagged the drop in the Fed rates pretty meaningfully. So while the Fed cut 150 basis points in March, one month LIBOR was only down about 50 basis points.

So as we see the catch-up of that and the relocation of those benchmarks, we're going to continue to see some pressure on repricing. We'll also see kind of a full quarter run rate of just natural and normal repricings. And all other things being equal, we'd expect that organic origination yields are going to come down, although I would say that spreads held up pretty well through the first quarter. So touch wood on that and maybe we can maybe it will occur.

Nathan Race -- Piper Jaffray -- Analyst

Okay. Got it. Got it. That's helpful. And then just on operating expense run rate. So I think you said you expect a modest uptick in the second quarter with Park in the full quarter. Can you help frame that up for us, just in terms of the dollar amount in terms of what you're expecting?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes. We had it was less than a month, call it a month of Park in Q1 and the full quarter run rate will add about $2 million across various categories, but the biggest categories will obviously be the most impacted across staffing. And away from that, as Mark already said, the pandemic-related impact will continue to have a run rate increase in cost because with pay premiums and occupancy increases due to cleaning, increased cleaning activity and things like that, you probably expect to see a noted noteworthy uptick in occupancy as well.

Nathan Race -- Piper Jaffray -- Analyst

Understood. And if I could just ask one more on the buyback. Looking forward, just curious maybe, Mike or Pat, if you can just maybe point, so one or two [Indecipherable] that's kind of the top of your list that you're looking at in terms of when it would be appropriate to reengage the buyback.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Well, I think that kind of goes to my comment. You've got to get certainly some sense of what normal looks like and some sense of overall stability. I think Pat alluded to it in his remarks, where he was talking a little bit about the buyback being suspended until we have that. And I started off. That's really hard to gauge when that would reengage because all that requires is a view on when things are more normal as they go through it. I certainly don't see it here in the immediate near term, though.

Mark G. Sander -- President and Chief Operating Officer

I'd add to that, that I think just as long as there's so much government and taxpayer funded stimulus activities that are flowing through the industry, and this is just an observation, that I think that it's unlikely you'd see much buyback activity resuming, if for no other reason, then just it feels wrong to be buying shares back at the same time that you're flowing government funds through your balance sheet.

Nathan Race -- Piper Jaffray -- Analyst

Understood. Agreed. And just to clarify, with the buybacks in the first quarter, I think you gave some approximations in the release, but what was the average price that you guys bought back shares out in the quarter?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Go ahead, Pat.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

It was around 19. Seemed like a good deal at the time. But it's less about opportunistically taking advantage of price fluctuations and really programmatically, just making sure we're deploying excess or anticipated excess earnings.

Michael Young -- SunTrust -- Analyst

Understood. I appreciate guys all the questions on the color great

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Great, thanks.

Operator

[Operator Instructions] And our next question will come from John Rodis of Janney. Please go ahead.

John Rodis -- Janney -- Analyst

Good morning, Maybe just a question on the PPP loans. What is the average fee on that $1.2 billion that you expect right now?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

I don't Pat or Mark, which one of you guys would take that.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

I could take that.

Mark G. Sander -- President and Chief Operating Officer

Sure, go ahead, Pat.

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

So gross, we've averaged about 3% on those and net around 2% after costs, and we partner with a third-party for origination and processing and execution. So that suggests an average size of somewhere in that middle bucket, between $350,000 and $2 million based on a fee basis. But based on the number of loans that we have, rather than the dollars, the vast majority are well below the $350,000 lowest limit category.

John Rodis -- Janney -- Analyst

Okay. So Pat, so I'm sorry, the net fee, around 2% roughly. And I would assume you probably would expect to get the majority of that over the next couple of quarters?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Correct.

John Rodis -- Janney -- Analyst

Okay. And then so you guys have been approved for $1.2 billion. Is it what does the pipeline look for doing additional PPP loans today?

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Mark, why don't you take that?

Mark G. Sander -- President and Chief Operating Officer

Yes. Appreciate the question because we did open it back up as we're getting virtually everything in our pipeline through earlier this week. And so, we still have about 350 more applicants we're trying to work through. That was as of last night, so they might have made progress because I haven't checked this morning, but since I work on through the night, I'm hoping that that's down. But as of yesterday it was about 350 that we're still trying to work through. 350 applications. Relatively modest dollar amounts right there. Mostly on the small side.

John Rodis -- Janney -- Analyst

Okay. Maybe Pat, maybe a question for you, just on the securities portfolio. You guys grew that some this quarter. Just how should we think about the size of the portfolio going forward?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes, John. I think in general, over time, we like the kind of mix of earning assets. So with overall balance sheet and loan growth, expect that to stay roughly similar. We're not running it down for liquidity needs or really growing it as a percentage of total just because of the kind of harsh reinvestment environment we're in. The growth that we had during the quarter was kind of a bit of a catch-up and a little bit of a pre-funding in anticipation of growth during the year. At that time, this was pretty pandemic. So we put on about $300 million in the first half, so January into February.

John Rodis -- Janney -- Analyst

Okay. So it sounds sort of flattish going forward, I guess, the size of the portfolio?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Yes. I think just reinvestment of cash.

John Rodis -- Janney -- Analyst

Okay. Pat, and I just wanted to make sure I heard you on a prior question about expenses. I think you said as far as Park goes, going from the first quarter to the second quarter, you said a full quarter is around $2 million?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Correct.

John Rodis -- Janney -- Analyst

Okay. And then, I guess, that would be $2 million running down some, I guess, with cost saves?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Sorry. Just let me restate that. $2 million incremental in the second quarter to the first quarter. So Park adds about $14 million on a full year run rate. And because it was a part quarter, we only recorded a little over $1 million, $1.5 million in Q1. So that will tick up to about a $3.5 million run rate, so an incremental increase across categories of about $2 million for Park.

John Rodis -- Janney -- Analyst

Okay. And that's with cost saves of $14 million?

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Correct. That's majority of. Yes.

John Rodis -- Janney -- Analyst

Okay, thanks guys.

Operator

[Operator Instructions] If there are no further questions, I will now turn the call back over to Mr. Scudder for closing comments.

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Thank you. So before closing, I appreciate all the questions. And hopefully, you've valued the presentation materials that we were able to pull together. Before I close it, I do want to take the opportunity once again, just to thank our colleagues. I know they listen to the calls and their response during these times have been absolutely amazing. To me, their commitment to living what we're all about and what First Midwest really is and what makes us special is just been absolutely tremendous.

I'm very proud to be surrounded by so many good people who are working their fannies off to do the right thing every day for our clients and our communities and for each other. So let me leave it with thank you for your interest and attention to our story. We continue to believe First Midwest is a great investment. These are difficult times. We'll work through them and come out on the other side stronger for it. So have a great day, everybody, and please stay safe. Thank you.

Operator

[Operator Closing Remarks]

Duration: 56 minutes

Call participants:

Michael L. Scudder -- Chairman of the Board and Chief Executive Officer

Mark G. Sander -- President and Chief Operating Officer

Patrick S. Barrett -- Executive Vice President, Chief Financial Officer

Chris McGratty -- KBW -- Analyst

Terry McEvoy -- Stephens -- Analyst

Michael Young -- SunTrust -- Analyst

Nathan Race -- Piper Jaffray -- Analyst

John Rodis -- Janney -- Analyst

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